The Client Who Pays the Wages: A Governance Covenant for Revenue Concentration

In many UK owner-managed companies, the most consequential governance document is not the articles of association or the shareholders' agreement. It is the list of customers. A single account can fund payroll, underwrite a bank facility and set the tone for the entire management week. When that account is lost, the failure is rarely sudden; it is the culmination of dependencies that were visible for years but never governed.

A concentration covenant is an internal instrument, not a regulatory one. It is a written commitment by the board to treat revenue concentration as a standing governance matter, with thresholds that trigger decisions rather than post-mortems. The purpose is not to avoid large clients. It is to avoid being surprised by them.

Concentration is a stewardship question, not a sales question

Sales teams are trained to celebrate the large account. Stewards are trained to ask what the large account has quietly become. If one client accounts for a third of turnover, the owner-manager has effectively granted that client a veto over investment, hiring and succession. The company may still be profitable, but its strategic freedom is borrowed.

This is why concentration belongs in governance rather than in the sales pipeline review. It affects the board's appetite for risk, the bank's view of the business, the owner-manager's exit timetable and the company's ability to say no to poor terms. A concentration covenant makes those links explicit and gives the board a reason to act while action is still cheap.

The stress test: from revenue share to dependence share

A simple revenue-percentage test is a useful starting point, but it is not sufficient. The headline share can understate or overstate the real exposure. A more reliable stress test examines five measures for each significant client.

First, gross revenue share: the client's invoiced value as a proportion of total turnover. Second, contribution share: the client's value after direct costs, because a low-margin account can be less dangerous than its revenue suggests, while a high-margin account can be more dangerous. Third, cash share: the proportion of receivables tied to the client, weighted by payment terms. Fourth, relationship share: how much of the relationship depends on one director, one account manager or one informal contact. Fifth, contract share: notice periods, termination rights, price-review clauses and any exclusivity or volume commitments.

Consider a UK company with £2.4 million of turnover and a largest client worth £720,000. On revenue alone, the client represents 30 per cent. If gross margin on the account is 45 per cent, contribution is £324,000. If annual payroll is £250,000, the account covers the wages. That is not merely a sales fact; it is a governance fact. The company is not just exposed to losing revenue. It is exposed to losing the mechanism that pays its people.

The stress test should be repeated quarterly and reported by exception. A client at 18 per cent of revenue but 35 per cent of contribution, with 60-day terms and a single buyer, may be more concentrated in practical terms than a 30 per cent account with a diversified contract and shorter payment cycle. The measure that matters is dependence, not merely size.

The dependencies behind the account

A key account is not one dependency. It is a bundle of them: a buyer, a contract, a payment behaviour, a service model and a set of operational assumptions. The hidden dependencies are the ones that do not appear in the management accounts until they fail.

Typical examples include a bespoke product line that exists only for one client, a delivery route or shift pattern built around that client's timetable, a key account manager who holds the relationship, a credit limit that assumes prompt payment, or a pricing arrangement that has never been indexed. Each is a concentration inside the concentration. The board should map them explicitly and ask which would be difficult to unwind within one quarter.

The mapping exercise need not be elaborate. A one-page schedule for each client above the amber threshold, listing the revenue, contribution, cash, relationship and contract exposures, is enough to turn a vague concern into a governed risk. The discipline lies in updating it, not in the sophistication of the template.

Drafting the covenant

The covenant should be short, specific and minuted. It should set thresholds that reflect the company's cost base and cash cycle, not a generic industry norm. A common structure is a green, amber, red and critical band.

Below 15 per cent, the client is monitored in the normal course. Between 15 and 24 per cent, the board reviews the account quarterly and restricts new dedicated capacity without approval. Between 25 and 29 per cent, a formal diversification plan is required, a pricing and terms review is triggered, and key-person cover is documented. At 30 per cent or above, the account becomes a board-level remediation item: no new investment dedicated solely to the client without a written case, a cash buffer is maintained, and an exit or reduction contingency is prepared.

The thresholds are tripwires, not targets. The point is to make decisions at agreed levels rather than in a panic. At the red threshold, the question is not whether to dismiss the client. It is whether the business can afford to keep the client on current terms. That may mean a risk premium in pricing, shorter payment terms, a longer notice period or a deliberate cap on the share of capacity the client is allowed to consume.

The quarterly discipline

The covenant only works if it is boring. It should appear as a standing item at every board meeting, with a one-page report and a named owner for each action. The report should state the current band for each significant client, the direction of travel, and any trigger that has been activated. Where a threshold has been crossed, the minute should record the decision taken, the rationale and the review date.

A covenant revisited only in a crisis is a post-mortem. A covenant reviewed quarterly is a steering mechanism. For the UK owner-manager, that distinction is the difference between stewardship and hindsight.

Concentration is not a sin. Unmanaged concentration is. The client who pays the wages can be a valuable partner, but only if the board governs what happens when the wages depend on them.